Is Rs 3/litre fuel hike not enough to save OMCs from bankruptcy? Will government increase fuel prices again?

The Rs 3/litre fuel hike falls short as OMCs lose Rs 1000 cr daily; analysts say Rs 10/litre rise needed to avoid bankruptcy with Brent above $100. Will the government increase fuel prices again?

With crude oil staying above $100/bbl through April 2026 amid Strait of Hormuz disruptions and West Asia tensions, India is in a difficult fiscal and inflationary position. The latest move of increasing the price of petrol and diesel by Rs 3 per litre as global tensions push Brent above $100, OMCs continue to face Rs 1000 cr daily losses. Though the government maintains supply security, the price holds may not be sustainable.

So, what is the government trying to do? What is the road? "At the current levels, the OMCs would go bankrupt without the increase in fuel price, so this bails out state-run fuel retailers," says Ishank Gupta, Analyst, Banking and Financial Services, Choice Institutional Equities.

Rs 3/litre petrol, diesel price hike: Will the government increase fuel prices again?
"While the current hike of up to INR3/litre increase in petrol and diesel prices provides partial relief to the profitability pressures faced by state-run OMCs (ONGC, BPCL, IOCL, HPCL),  the magnitude of current under-recoveries remains significantly elevated, " says Dhaval Popat, Energy Analyst at Choice Institutional Equities.

"Based on industry sales volumes, every INR1/litre increase in fuel prices can improve annualised EBITDA by roughly INR15,000–16,000 crore for the three PSU OMCs combined, implying that the latest hike could translate into an annualised earnings benefit of nearly INR45,000–48,000 crore across OMCs.However, against estimated industry-wide losses currently running at nearly INR1 lakh crore monthly, the present hike only offsets a limited portion of the earnings erosion," Mr Popat adds.

"Rs 3 per litre hike is inadequate to bridge the severe under-recovery gap created by Brent crude soaring past $100 per barrel. Consequently, upstream giant ONGC remains the primary beneficiary due to expanding profit margins on exploration, making it a stronger choice for capital appreciation. Conversely, downstream oil marketing companies like IOCL, BPCL, and HPCL will continue to face depressed earnings, potential analyst downgrades, and dividend cuts until global oil prices stabilise or the Indian government grants them a multi-billion-dollar fiscal bailout package," explains Abhishek Bhilwaria, AMFI-registered MFD.

'To restore profitability to pre-crisis levels and fully neutralise current marketing losses, a substantially larger increase in retail fuel prices would likely be required, potentially well beyond the current INR3/litre adjustment, unless accompanied by a meaningful correction in crude prices, reduction in product cracks, or government-led compensation measures," points Mr Popat.

Mr Popat warns that further hikes are required to offset the current losses. "In the above backdrop, provided there is no change in the global scenario, and the crude price continues to build, a rise of Rs 10/litre overall, which includes a Rs 3/litre hike, would be required to offset the losses," he adds.

Fuel price hike: Impact on the economy?
Based on the weightage of Fuel in the new CPI series 2024, this indicates a potential increase in CPI inflation by ~60 bps. Mr Ishank Gupta says, "The FY27E CPI inflation is expected to increase by 90 bps to 5.5%, factoring in second and third order impact of overall supply chain and the increase in prices of goods and services. He believes, "If the retail fuel price hikes are contained, no increase in repo rates is observed. Further increase in retail fuel prices has upside risks to our inflation forecast and would lead to appropriate action by the MPC committee," he adds.

Prof. Debasis Rooj, Faculty of Economics, FLAME University, highlights the broader concern in "the multiplier effects of persistently high fuel prices." "Elevated fuel costs do not merely increase household expenditure at the pump; they transmit inflationary pressures across the economy through higher transportation costs, squeezed manufacturing margins, and rising prices of essential commodities. Over time, these indirect effects can quietly but steadily intensify generalised inflationary pressures and weaken household purchasing power," he adds.

This article has valuable insights from Prof. Debasis Rooj, Faculty of Economics, FLAME University.